What is my Tax Free Allowance?

Your Tax Free Allowance is more commonly referred to as your Personal Allowance. The rate of Personal Allowance normally changes each year and is published by the Chancellor as part of the UK Budget. Nearly everyone who lives in the UK is entitled to an Income Tax Personal Allowance and the amount of personal allowance you receive is dependent on:

How much you earn. If you earn in excess of £100,000.00, your personal allowance will be reduced by £1.00 for every £2.00 earned over £100,000.00 until your personal allowance reaches zero.

Your age. Certain age groups are protected by previous tax laws and conditions.

You can review current and historical Personal allowance figures here. The graph below illustrates how the amount of personal allowance has changed. This graph is based on an individual earning 40k per year and includes PAYE tax payments only.

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Personal Allowance

4,335

4,385

4,535

4,615

4,615

4,745

4,895

5,035

5,225

6,035

6,475

6,475

7475

8,105

9,440

10,000

Higher Rate Threshold

28000

28400

29400

29900

30500

31400

32400

33300

34600

34800

37400

37400

35000

34370

32010

31865

Tax due lower rate

4733

4803

4973

5057

5177

5331

5501

5653

5875

5753

6185

6185

5505

5253

4514

4373

Tax Due Higher rate

4800

4640

4240

4040

3800

3440

3040

2680

2160

2080

1040

1040

2000

2252

3196

3254

Total Tax Payable

9533

9443

9213

9097

8977

8771

8541

8333

8035

7833

7225

7225

7505

7505

7710

7627

As we can see from the figures:

The amount of Personal Allowance has steadily increased over the past 15 years to more than double the amount of Personal Allowance 10 years ago. That's excellent news for workers.

The figure for the higher rate threshold (the point at which you start to pay 40% tax rather than 20% tax) consistently rose during the labour government. The net impact when coupled with the increase in personal allowance was that the average worker was paying less tax (in 2009, an individual earning 40k per year paid over 2k less teax per year than in 1999, have almost an extra £175 per month in their pocket).

Since coming into power in 2009, the Conservative Government have continued to increase Personal Allowance but have consistently reduced the Higher Rate Threshold. The net impact is that our example worker earning 40k is starting to pay more tax at the Higher Tax Rate of 40%.

At the low point in 2009, our example worker was paying circa £7225 per year in tax, in 2014 they are paying nearly £500 more (circa £45 per calendar month).

So, what does it all mean. iCalculator is apolitical, we have no interest in a political party and the figures above are not indicative of one party being better than another or having more of a vested interest in individual workers. We have to remember that during the labour term we had a boom, t was easier to spend money and be flamboyant, the conservatives have had to balance austerity in their figures. So, forget the parties, this is what you need to understand about Personal Allowances and its relationship to the Higher Rate Tax threshold.

The higher the Personal Allowance, the more you can earn before being taxed.

The lower the Higher Rate Tax threshold, the sooner you will have to pay tax at 40%.

Cost of living increases and salary increases mean that we are all slowly earning more, the average person is getting closer and closer if not exceeding the Higher Rate Threshold.

Personal Allowance and the Annual Inflation Rate

The rates of Personal Allowance, The Higher Rate Tax Threshold are not married to The Annual Inflation Rate (AIR). Lets look at what the figures would look like from 2009 onwards in they were.

The Graph below illustrates how Personal Allowance and the Higher Rate Tax threshold would look if they were linked to the annual Inflation Rate.

By linking to the annual Inflation Rate our example worker on 40k a year would have paid more tax during the 'good times' and less tax now during periods of austerity. There are many good arguments for 'paying your way' during the good times to make the bad times easier to manage. Clearly this is just a snapshot and there are also good arguments for manually setting Personal Allowance and the Upper Tax Threshold but we trust this provides food for thought.

Summary

In summary, your Personal Allowance (Tax Free Allowance) is the amount of income you can receive each year without having to pay tax on it. Depending on your circumstances, you may also be able to claim certain other allowances. The amount of Tax Free Allowance varies between individuals and is based on specific circumstance and criteria such as Age and the Total Income (Gross Pay, money from savings and Pensions etc. before Tax has been deducted) for the Tax Year.

Further Reading

If you are interested in how your income tax and personal allowances are calculated, you can read an explanation here